Welcome to TheMarket.co.za Weekly Analysis Report
Date of Issue: 23November2016
By Colin Abrams
Classic Trading Rule:”Markets have a tendency to move from relative lows to relative highs and vice versa every two to four days. It’s a function of human behaviour.”
NO JSE FOLLOW THROUGHYET
Introduction:
In last week’s newsletter we discussed how the JSE was lagging its US counterparts by a long way. We've had a rally over the past week locally but right now the JSE All Share index is giving a classic reversal day down today (Weds) and this one has to say, is another short-term short signal. This, remarkably, is following on from new all time highs across all three main US stock indices. It seems like it’s more an emerging markets issue than JSE-specific. As a result of all this, one has to continue taking it on a stock by stock basis, and be extra picky on what you trade. I can tell you that resi stocks are still buyable on pullbacks, while large-cap industrials are still shortable on rallies. Upside reversal weeks last week on the indi 25 and findi 30 indices are notfollowing through yet.
The S&P 500 index can still go a bit higher, but is due for some pullback soon. The JSE All Share index chart shows it reversing down today, and a weak close will be a short signal on it. We show the German Dax, which is setting up of a potential upside breakout. And a chart of the gold price ($) shows it testing very important support right now. The stock charts shown are Barworld (two higher targets for buying), Pick ‘n Pay (a low risk buy),and MTN-Group (potential buy signal lining up).
The small-capstock is CSG, which has given animportantupside breakout for buying.
Overall, we have a very peculiarsituationnow where the JSE is just not able to take off. It continues to lag the US by a long way, and this means one has to be extremelypicky about what you trade, and not to base one’s view (of what will happen) on what the US is doing. There are however some areas of positivity in the findi area, and that is mostly amongst the banking stocks. Apart from that, its still resi stocks that are trying to move higher when given theopportunity.
Executive Summary:- S&P 500 (chart 1): Continue with a prior one-day low as the trailing stop. Buy a pullback to 2177-2168.
- All ShareInx: (chart 2):Sell short if it gives a reversal day/candle down, but with great caution
- Dax (chart 3):Buy a close above line 4(10803).
- Gold ($) (chart 4):Aggressive traders only, buy a break above $1214
- Barworld (chart 5):Buy on a minor pullback
- Pick ‘n Pay (chart 6):Buy on a close above line 2
- MTN-Group (chart 7):Buy a close above line 1 (R121.50).
- CSG (chart 8):Buy at current levels.
- Leading Stocks (3-mths): Top 40 – Anglo, BHPBilliton, Firstrnd, Stanbank, Nedbank, Bidvest, Investec
- Shortable stocks/instruments: 19
1. MARKET CHARTS
S&P 500 INDEX –Overbought short-term
Broad Recommendation:TIGHTEN STOPS/BUY A PULLBACK
Current Trend:Short-term up. Med-term turning up. Long-term up.
Strategy:Continue with a priorone-day low as the trailing stop. Buy a pullback to 2177-2168 range.
Chart 1. (Daily)
Chart Setup: The S&P reached and moved above its resistance zone of lines 3 and 4 (for locking in more profits on the current long trade). It didn't gave a pullback to buy for those not already in (unlike the Dow which did). So far its prior one-day low trailing stop has still to been triggered. It can still go a bit higher, but look for a correction soon.
- Its short-term Stochastic (on top) is overbought and giving a negative divergence, pointing to some sort of pullback soon.
Strategy Details: Continue with a breaking of its prior one-day low as the trailing stop on the remaining portion of this long trade. Look to buy again on a short-term pullback e.g. to the 2177-2168 range, followed by a reversal day/candle up (see Glossary).
Target:Upside target is still 2200, based on the height of channel 1-2 projected up. Pullbackpotential to 2177-2168 as mentioned.
Stop-loss:A prior one-day low on remaining longs. For buying after a pullback, place the stop as a close below 2158.
JSE ALL SHARE INDEX–Reversing back down today [Signals done on alsi future]
Broad Recommendation:MILDLY SHORTING BIAS
Current Trend:Short- and med-term down.Long-term sideways.
Strategy:Sell short if it gives a reversal day/candle down, but with great caution.
Chart 2. (Daily)
Chart Setup:The All Share has had a goodrally over the past week and it gave a reversal week up last week. An email update sent out on Monday said to look to go long. However, looking at the above chart its index is technically still in a downtrend, and will need to really close above line 4 (52150) to put it back into a ‘buying the dips’ situation. Right now, I can't see a long entry, but the truth is I don't feel comfortable going short here either. I've drawn lines 2 and 3 as a channel, and there is still downside potential based on a large diamond pattern.
- Its short-term Stochastic can still go higher, and its weekly Stochastic (to shown) is oversold (bullish).
Strategy Details: Frankly there are too many unknowns right now, but if I ‘had to’choose, I would say look to go short again on a reversal day/candle down. It is not a high probability trade though.
Target:Resistance is line 3 (line 3 is at 51510 on Weds 23rd and it’s declining at an angle of 20 pts per day thereafter). If we get a reversal down, start takingprofits from 50 200-49850. Fibonacci support (marked as ‘5’ is at 49350). The diamond pattern is pointing to 48800. My gut feeling is the price will go higher overall, but I can't see it yet on the chart. But as the famous trading adage goes, ‘trade what you see, not what you think’.
Stop-loss: If attempting another short, place the stop as a breaking of its prior two-day high from the start, or a close above line 3 (whichever triggers first). (Line 3 is at 51510 on Weds 23rd and it’s declining at an angle of 20 pts one day thereafter).From 50200 lower the stop to a breaking of its prior one-day high.
DAX – Upside breakout potential
Broad Recommendation:BUY A BREAKOUT
Current Trend:Sideways on all main timeframes.
Strategy: Buy a close above line 4(10803).
Chart 3. (Daily)
Chart Setup: Right now the German daxisthreatening an upside breakout of a med-term broadeningformation (lines 3 and 4). Longer-term,it’s in a rising channel (lines 1 and 2).
- Its short-term Stochastic (on top) is overbought, but I would give the breakout more significance if we get it.
Strategy Details: Buy a close above line 4 (10803).
Target: Minimum target is up to 11460 i.e. the height of the broadeningformation projected up. Take half profits there. Further potential is to/near line 2 at the 10550 level for takingremaining profits.
Stop-loss:Initial stop will be a close below 10580. Once the price gets to 11180, move the stop up to a close below line 4 (i.e. below 10800). And from the 11460 target take half profits and raise stop again to a breaking of is prior two-day low on the remainder.
GOLD ($) – Will support hold?
Broad Recommendation:AGGRESSIVE TRADERS ONLY, LOOK TO BUY
Current Trend:Short and med-term down, but oversold.
Strategy: Aggressive traders only, buy a break above $1214.
Chart 4. (Daily)
Chart Setup: The gold price has fallen hard in recent weeks, but is now testing a very important support level (line 1). This is a good example of old resistancebecoming new support. There is a reasonable chance of a rally from line 1, but it is by no means guaranteed. Yesterday (Tues.) it did give a reversal candle up from there, which is positive.
- Its MACD (on top) is giving apositivedivergence(see Glossary) from its oversoldregion, warning of a rally to come.
StrategyDetails:Aggressive traders only, buy it on an intraday break of yesterdays high ($1214).All others traders wait for a reversal week up from line 1/current levels, to buy. (Line 1 is actually more a zone of support, at $1200-$1192).LATE FLASH: It’s dropping to test the $1192 level right now; be careful].
Target: The price needs to close above line 2 ($1241) to have a good rally. But short-term traders should take partialprofit near line 2 ($1240 level). If it closes above there then expect more of a rally to $1280 to take remaining profits. I'm not sure we’re going to get much more than that for now, in terms of upside.
Stop-loss: A close below $1190. From $1239 raise the stop to a breaking of its prior two-day low. Then prior one-day low from $1275.
Note:Given a recent upside breakout in the US dollar index (assuming it doesn't fail), the strong dollar is likely to keep gold under pressure for a while, notwithstanding any temporary rallies. A decisive close below $1190 would be very bearish for gold, pointing to a retest of its Nov/Dec (2015) lows of $1050.
BARWORLD (BAW) – Two higher targets
Broad Recommendation:BUY
Current Trend:Sidewayson all main timeframes but turning up.
Strategy: Buy on a minor pullback.
Chart 5. (Daily)
Chart Setup: On Monday Barworld broke out of a med-term sideways channel (lines 2 and 3). It has also formed a large inverse head and shoulders (as labelled), with a significantly higher target in place.
- Its short-term Stochastic is nearing its overbought zone, but can go higher. Its weekly Stochastic (not shown) still has good upside.
Strategy Details: Buy at current levels for the short and med-term. [LATE FLASH:It has already had a big run today since this was written. Therefore wait for a minor pullback to buy e.g. to the R96 level].
Target: Target 1 is R106.00 (minimum) based on the height of channel 2-3 projected up. Take at least half trading profits there. But pullbacks will remain buyable on anongoingbasis. Its larger target is R135 i.e. the height of the inverse H/Sh projected up.
Stop-loss: Initial stop is a close below R93.00. From R103 raise the stop to a breaking of its prior two-day low. Then prior one-day low from R105 (for short-term traders only). Med-term give it more space.
PICK ‘N PAY (PIK) – Low risk buying levels
Broad Recommendation: BUY A BREAKOUT
Current Trend: Short and med-term technically down, but oversold. Long-term up.
Strategy: Buy on a close above line 2.
Chart 6. (Daily)
Chart setup: Pick ‘n Pay is an excellent long-term performer. It’sdroppedsharply in recent months to reach its long-term support line (line 1). Right now,it’sforming a potential inverse head andshoulders, with line 2 as the neckline. An upside breakout is very possible.
- Its short-term Stochastic (on top) is giving a series of positivedivergences, warning of a rally to come.
Strategy Details: Buy on a close above line 2 (R67.00).
Target: Minimum target once that signal triggers, will be R74.20 i.e. the height of the inverse H/Sh projected up. Take most profits there. Take the rest at R75.
Stop-loss: Initial stop will be a close below R62.20. From R71.20 raise the stop to a close below line 2 (R67). And from R72.40 raise the stop again to a breaking of its prior two-day low.
MTN-GROUP (MTN) – Potential upside breakout developing
Broad Recommendation:BUY A BREAKOUT
Current Trend:Short and med-term sideways. Long-term down
Strategy: Buy a close above line 1 (R121.50).
Chart 7. (Daily)
Chart Setup: MTN is forming a ‘potential’ inverse H/Sh. It is not classically formed at the moment, but is still worth taking note of. Line 2 is the neckline, but because there is an importantoverhead resistance zone at line 1, I'm using line 1 as the entrylevel.
- Its short-term Stochastic (on top) can still go a bit higher, but its weekly Stochastic (no shown) still looks bullish.
Strategy Details: Buy it on a close above line 1 (R121.50). (Keep in mind, for now this stock is still in a downtrend, so don’t pre-emt any breakout).
Target: Up to R137.50, based on the height of the inverse H/Sh projected up. Take half profits at R133.50 on the way up though.
Stop-loss: Initial stop will be a close below R114.00. Once it gets to R128 though, raise the stop to a close below R118.80. From R133.50 take half profits and raise the stop to a breaking of its prior two-day low on the remainder.
2. SMALL-CAP. CHART
CSG(CSG) –Bullish breakout
Broad Recommendation: BUY
Current Trend:Short and med-term up. Long-term sideways to down.
Strategy: Buy at current levels.
Chart 8. (Weekly)
Sector:AltXPrice:R1.51
Chart Setup:CSG has broken out of a long-term declining channel (lines 1 and 2), based on its weekly line chart. It has also formed a smaller symmetrical triangle (line 3 and part of line 2). There are two higher targets in place.
- Its weekly Stochastic (on top) is in its overbought region, but if this is a new sustained trend then expect it to remain overbought for an extended period of time.
Strategy Details:Buy at current levels.
Target:The first target (T1) is R1.79 i.e. the height of triangle 2-3 projected up. While one can take some short-term profits there, the larger target (T2) is at R2.08, based on the heightof the channel projected up. Because this is a line chart i.e. closingprices only, it’s likely those targets will be exceeded.
Stop-loss:Initial stop is a weekly (Friday) close below line 3 (R1.35). Once it trades up to the first target (R179) and closes there on a daily basis, bring the stop up to a close below R1.50.
Other small-caps of interest (alphabetically):(shares to consider on a pullback)
- Afro-C, Ansys, Esor, Huge, ISA, Kap, Sentula.
3. RELATIVE STRENGTH
These are the strongest index stocks on a 3-month basis relative to the JSE All Share Index.
Typically the leading stocks keep leading. Therefore, traders can buy these stocks on pullbacks, although always look at the chart first before making a decision. Medium and longer-term players should look to buy them when they first appear on this list.
We've also included the weakest index stocks. These can either be shorted on bounces (if in a downtrend), or traded as a "pairs trade" against the strongest stocks i.e. go long a strong stock, and sell short a weak stock at the same time.
Strongest seven Top 40 stocks:Anglo, BHPBilliton, Firstrnd, Stanbank, Nedbank, Bidvest, Investec.
Weakest seven Top 40 stocks:Sibanye,Gfields, Mr-Price, Anggold, Medclin, Steinhof, Brait.
Strongest five Resi 10stocks:Anglo, Sappi, BHPBilliton, Sasol, Mondi.
Resi 10 vs. Findi 30 over 3-months: Resi 10is stronger.
4. NOTES & UPDATES: - Concerning last newsletter’s index stockcharts:
-Sappi:continue to hold, this trade continues to grind higher. Target is 90.50 still. Stop to be moved up to a close below 75.50. From 86 lock in partial profits, and raise the stop again to a close below 80. From 88 raise it to a breaking of its prior two-day low.
-InvPlc:keep holding, its moving gradually higher. It hasn't given much chance to add to the position i.e. buy the second half as per last weeks commentary, but that's ok. Minimum target up to 95.70 still. Take at least half profits there. Take more profits at R97.40 if reached. Stop is a daily close below 83.20. Once it gets to 94 raise the stop to a breakeven (your entry level). And from 95 raise it to a breaking of its prior one-day low.
-Naspers-N: while it sold off a lot from its high last Weds (so no buying would have been done), I did send an email update on Monday to say it can be bought based on a reversal week up it gave last week. It is pulling back sharply today so far, but it’s a hold (but with a lot of caution). I did say it wasa counter trend trade and therefore far more risky. The stop nevertheless is still a close below 2090. If it can close above yesterdays high of 2197.50, that will be a very positive sign, and point to a move to 2330 for taking at least half profits. Take the rest at 2350. But for now caution is advised.
Other recommendations and index stocks of interest (alphabetical order):
Important Notice: When buying after a pullback or selling short after a bounce, always look for a sign of a reversal e.g. reversal day or reversal candle before entering (otherwise one is simply picking a top/bottom, which does not work). A reversal day/candle at the top is typically when the price rallies that day but then sells off to close near the bottom of the day’s range. Conversely, a reversal day/candle at the bottom is when the price initially drops that day, but then rallies back to close near the top of the day’s range. Waiting for the reversal day will put the odds back in your favour. (I usually like to see the high/low of the reversal day taken out the next day before finally entering i.e. the entry ‘trigger’).
-Regarding taking profits, I suggest locking in profits in thirds as the price moves in your favour i.e. 1/3 of your position, then another third then the final third.
High probability trades (or charts),other than Charts 5, 6, and 7, that I particularly like (long or short) at the moment (in no particular order. See comments below):
-Arcmittal, Aveng, LifeHC, Imperial, BATS, Stanbank, Shoprit, Old Mutual.
-Anggold: bounced to our shorting level and has moved down again. It’s a hold on the short side therefore, but take partial profits near 150. There is support at 140, but I can't say it will fall that far. Use a breaking of its prior 2 day high as a trailing stop for now.
-Angloplat: stopped fractionally above its 290 target and given a slight bounce, activating its prior one day high to lock in a profit. It remains vulnerable though. There is some support at 286 where profits should be taken if shorting on a minor rally e.g. 2-3 days followed by reversal day down. Stop above there reversal days high.
-Anglo: pulled back to (fractionally above our pullback buying level, but close enough – remember don't be too much of a perfectionist when it comes to trading, except for sticking to stops). Take half profits now, as its back to its recent high and use a prior one day low as the trailing stop on the remainder. Bigger picture I expect it to make its way up to 300 so pullbacks will remain buyable.